7. Income Taxes

The following summarizes our income tax benefit (provision) (in thousands):


	Year Ended December 31,
	2018		2017
Current:
U.S. federal	$	47,761	$	(13,783)
State and local		867		21,114
Foreign		(250)		(250)
Total current		48,378		7,081
Deferred:
U.S. federal		(9,036)		(80,136)
State and local		6		(53)
Total deferred		(9,030)		(80,189)
Total income tax benefit (provision)	$	39,348	$	(73,108)

Our current tax benefit includes a decrease to our liability for UTPs for (in thousands):


	Year Ended December 31,
	2018		2017
Unrecognized tax benefits	$	41,115	$	1,062
Interest expense		6,752		429
Penalties		—		5,985
Total	$	47,867	$	7,476

The deferred tax provision for each period included the impact of equity in net (loss) income of affiliates in our consolidated statement of operations. For 2018, after utilization of our net operating loss (“NOL”) carryforward, there was no federal income tax on GILTI from Telesat.

For each period presented, the statute of limitations for the assessment of additional tax expired with regard to several of our federal and state UTPs and certain other UTPs were settled. As a result, the reduction to our liability for UTPs provided a current tax benefit including the reversal of previously recognized interest and penalties, partially offset by additional provisions for the potential payment of interest on our remaining UTPs and in 2017, unrecognized tax benefits.

The Tax Cuts and Jobs Act made broad and complex changes to the U.S tax code, such as the imposition of a one-time transition tax in 2017 on certain unrepatriated earnings of controlled foreign corporations, including Telesat, and numerous changes first effective in 2018 including, but not limited to, (1) reducing the U.S. federal corporate income tax rate from 35 percent to 21 percent; (2) eliminating U.S federal income taxes on dividends from certain foreign investments, such as Telesat; (3) requiring a current inclusion in U.S. federal taxable income of certain earnings of controlled foreign corporations, including Telesat, as part of GILTI; (4) limiting the use of foreign tax credits (“FTCs”) to reduce U.S. federal tax liability; (5) eliminating the corporate alternative minimum tax (“AMT”) and changing how AMT credit carryovers can be realized; (6) creating the base erosion anti-abuse tax, a new minimum tax; (7) creating a new limit on deductible interest expense; and (8) changing the rules related to the use of NOL carryforwards created in tax years beginning after December 31, 2017. In accordance with SAB 118, we recognized the income tax effects of the Tax Cuts and Jobs Act in our 2017 and 2018 consolidated financial statements. As of December 31, 2017, we reduced deferred tax assets by $33.2 million related to the tax rate reduction with a corresponding increase to our deferred income tax provision and increased non-current income taxes receivable by $1.6 million related to refundable AMT credits with a corresponding reduction to deferred tax assets. During 2018, the U.S. Treasury and Internal Revenue Service issued additional regulatory guidance on various provisions of the Tax Cuts and Jobs Act. Based upon our interpretation of this guidance, we determined that, after the utilization of FTCs, federal income tax imposed on the future recognition of GILTI from Telesat will be zero. Since we anticipate that our deferred tax assets related to the investment in Telesat will be realized from the future recognition of GILTI, the federal portion of these deferred tax assets should be valued at zero. Therefore, as of December 31, 2018, we reduced deferred tax assets by an additional $1.5 million with a corresponding increase to our deferred income tax provision.

The current tax provision for the year ended December 31, 2017 included our anticipated income tax liability related to the cash distribution received from Telesat after use of AMT credits and NOL carryforwards and FTCs from Telesat. In 2018, we completed our tax study to determine the allowable amount of FTCs that could be utilized to minimize our cash tax liability and adjusted our deferred tax asset for the carryforward of unused FTCs to $109.6 million. Since, at the current time, sufficient positive evidence does not exist to support full recovery of the FTC carryforward, we have a full valuation allowance against this deferred tax asset.

In addition to the income tax benefit (provision) presented above, we also recorded the following items (in thousands):


	Year Ended December 31,
	2018		2017
Tax benefit on loss from discontinued operations	$	16	$	3
Cumulative effect adjustment attributable to previously unrecognized
excess tax benefits on stock-based compensation		—		4,697
Deferred tax (provision) benefit for adjustments in
other comprehensive loss (see Note 3)		(481)		10,226

The benefit (provision) for income taxes differs from the amount computed by applying the statutory U.S. federal income tax rate on the loss from continuing operations before income taxes and equity in net (loss) income of affiliates because of the effect of the following items (in thousands):


	Year Ended December 31,
	2018		2017
U.S. Statutory Federal Corporate Income Tax Rate		21%		35%
Tax benefit	$	1,104	$	3,069
Permanent adjustments which change statutory amounts:
State and local income taxes, net of federal income tax		666		15,413
Equity in net (loss) income of affiliates		(6,241)		(73,997)
Federal benefit (provision) for unrecognized tax benefits		46,534		(1,234)
Nondeductible expenses		(957)		(1,235)
Change in valuation allowance		(4,329)		(120,389)
Income tax credits		4,554		138,780
Foreign income taxes		(250)		(250)
Effect of U.S. tax law changes		(1,542)		(33,248)
Other, net		(191)		(17)
Total income tax benefit (provision)	$	39,348	$	(73,108)

The following table summarizes the activity related to our unrecognized tax benefits (in thousands):


	Year Ended December 31,
	2018		2017
Balance at January 1	$	70,410	$	68,149
Decreases as a result of statute expirations		(27,355)		(14,172)
Increases related to current year tax positions		—		16,433
Balance at December 31	$	43,055	$	70,410

With few exceptions, the Company is no longer subject to U.S. federal, state or local income tax examinations by tax authorities for years prior to 2014. Earlier years related to certain foreign jurisdictions remain subject to examination. To the extent allowed by law, the tax authorities may have the right to examine prior periods where net operating losses were generated and carried forward, and make adjustments up to the amount of the net operating loss carryforward. While we intend to contest any future tax assessments for uncertain tax positions, no assurance can be provided that we would ultimately prevail.

Our liability for UTPs decreased from $61.2 million at December 31, 2017 to $13.3 million at December 31, 2018 and is included in long-term liabilities in the consolidated balance sheets. At December 31, 2018, we have accrued $0.5 million for the potential payment of tax-related interest. If our positions are sustained by the taxing authorities, approximately $6.1 million of the tax benefits will reduce the Company’s income tax provision from continuing operations. Other than as described above, there were no significant changes to our unrecognized tax benefits during the year ended December 31, 2018, and we do not anticipate any other significant increases or decreases to our unrecognized tax benefits during the next twelve months.

At December 31, 2018, we had federal FTC carryforwards of $109.6 million, federal NOL carryforwards of $107.1 million and New York NOL carryforwards of $1.5 million which expire from 2022 to 2034, as well as state AMT and state research credit carryforwards of approximately $1.3 million that may be carried forward indefinitely.

The reorganization of the Company pursuant to emergence from Chapter 11 of the federal bankruptcy laws during 2005 constituted an ownership change under section 382 of the Internal Revenue Code. Accordingly, use of our tax attributes, such as NOLs and tax credits generated prior to the ownership change, are subject to an annual limitation of approximately $32.6 million, subject to increase or decrease based on certain factors.

We assess the recoverability of our FTCs, NOLs and other deferred tax assets and based upon this analysis, record a valuation allowance to the extent recoverability does not satisfy the “more likely than not” recognition criteria. We continue to maintain our valuation allowance until sufficient positive evidence exists to support full or partial reversal. As of December 31, 2018, we had a valuation allowance totaling $128.4 million against our deferred tax assets for certain tax credits, primarily FTC carryovers from 2017, and loss carryovers due to the limited carryforward periods. During 2018, the valuation allowance increased by $4.3 million, which was recorded as a provision to continuing operations in our statement of operations. Subsequent to the SSL Sale, to the extent that profitability from operations is not sufficient to realize the benefit from our remaining net deferred tax assets, we would generate sufficient taxable income from the appreciated value of our Telesat investment in order to prevent federal net operating losses from expiring and realize the benefit of all remaining deferred tax assets.

During 2017, the valuation allowance increased by $120.4 million, primarily for FTC carryovers from 2017, which was recorded as a provision to continuing operations in our statement of operations.

The significant components of the net deferred income tax assets are (in thousands):


	December 31,
	2018		2017
Deferred tax assets:
Net operating loss carryforwards	$	36,875	$	43,557
Foreign tax credit carryforwards		126,007		121,360
Compensation and benefits		953		943
Indemnification liabilities		216		216
Other, net		219		454
Federal benefit of uncertain tax positions		98		1,518
Pension costs		3,157		3,458
Investments in and advances to affiliates		1,360		2,546
Total deferred tax assets before valuation allowance		168,885		174,052
Less valuation allowance		(128,365)		(124,036)
Deferred tax assets	$	40,520	$	50,016